October 28th, 2024 | Buying
Will 30-year Mortgages Help First-Time Home Buyers?
Many first-time home buyers have been feeling shut out of the real estate market for a while now. A common complaint we all have is that the prices of everything are going up while incomes remain at a standstill. Even in Ottawa, where prices are far more affordable than in the GTA, for example, it can still be challenging to cover the costs of homeownership along with everything else.
To make it easier on first-time home buyers, the federal government is expanding eligibility for 30-year amortizations for insured mortgages to all first-time homebuyers and all purchasers of new builds, and increasing the $1 million price cap for insured mortgages to $1.5 million, effective December 15, 2024. Are these a good idea and will they help first-time buyers? In this post, we’ll look at how this development will affect the younger generation.
Looking for some practical advice when buying your first (or next) home in Ottawa? Our Buyer’s Guide will fill in the gaps. Download your copy today right here.
Down Payments and Deposits Haven’t Changed
Up until this announcement, the only way to get a 30-year mortgage was to ensure you had a down payment of at least 20% of the purchase price. An added benefit of having this amount upfront is you’d no longer need mortgage insurance, which would save a significant amount of money over the long term. But if a first-time buyer had access to that kind of capital, they would likely not be struggling to buy a house in the first place.
The new rules allow 30-year mortgages with less than a 20% down payment as long as your purchase meets certain requirements. However, keep in mind that paying less upfront means you will need mortgage insurance. This could offset some of the affordability from longer amortization periods.
The final amount you need for a down payment depends on the purchase price of a house. This is true whether or not you decide on a 30-year mortgage or to stay with the more traditional 25.
- If the house is $500,000 or less, you only need 5% (up to $25,000).
- For a house from $500,000 to $1 million, you’ll need that 5% on the first $500,000 and 10% on any remaining amount. For example, a $700,000 house requires a $45,000 down payment. ($25,000 + $20,000)
- If your house is $1 million or more, the down payment is 5% on the first $500,000, 10% on the amount from $500,000 to $1 million, and 20% on anything over $1 million.
Are you helping a child or loved one get into the Ottawa real estate market? The posts below can be useful for everyone involved:
- Should I Gift My Child a Down Payment For Their Home?
- Should I Buy an Investment Property Now for My Kids in the Future?
- Strategies to Help First-Time Buyers Enter the Real Estate Market
The Benefits of a Longer Mortgage
As you can expect, many first-time buyers will find it challenging to come up with enough funds for their down payment. Programs like the Home Buyer’s Plan and the First Home Savings Account can help. Nevertheless, this is typically a lot of money for someone just starting out.
The carrying costs are another obstacle for first-time home buyers. That’s where the 30-year mortgage can help. By spreading out each payment over a longer amortization period, the monthly costs are reduced.
To keep it simple, let’s use an example where your purchase price is $600,000 and you are placing a 20% down payment. Here’s how your monthly payments would break down given an interest rate of 4.49%.
- Imagine you choose an ambitious plan to pay off your mortgage in just 15 years. Your monthly payment would be $3659.
- A 20-year mortgage means a monthly payment of $3,023, which is still assertive, but more manageable than the shorter timeframe.
- A standard 25-year mortgage requires a payment of $2,654 each month.
- Extending your amortization period to 30 years means the lowest payment yet at $2,445 each month.
A couple hundred dollars less each month may not seem like much. However, for some buyers, it can be the difference between affording a home and remaining in the rental market.
How much should you expect your monthly payments to be? You can get an accurate estimate with our buying calculator, which you’ll find right here.
Why choose Ottawa for your next home? Explore just a few of the many reasons in the posts below:
The Limitations and Drawbacks of 30-Year Mortgages
Choosing a 30-year mortgage may make buying a home more attainable in the current market. That said, there are some limitations and downsides to be aware of. If you have enough for a 20% down payment, the longer amortization is already an option.
If not, you can only qualify for a 30-year mortgage if you’re a first-time buyer and the home you’re purchasing is a new-build. The idea is that this will help make the monthly payments more affordable while providing incentive for builders to construct more housing.
Though lower monthly payments feel less burdensome, remember that a longer mortgage can make your home more expensive over time. If you can find room in your budget to pay your mortgage faster, you could potentially save thousands of dollars in interest. Nevertheless, owning a home will likely be one of the most financially and emotionally rewarding investments you can ever make – however you make it happen.
Do you want personalized guidance and advice when buying your next home? Our knowledgeable Ottawa real estate agents are ready and waiting to help every step of the way. Give us a call at 613.829.7484 or email mail@chellteam.com for more information.
